Unbundled Providers Make Sense for Small Plans
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Workplace retirement plan sponsors have a number of responsibilities to fulfill when selecting service providers. Service providers help perform three important functions of 401k plans: record keeping (processing transactions such as contributions, loans, distributions, website access, reporting); third party administration (TPA) (compliance, plan documents, non-discrimination testing); and investment advisory (management of investments).
One decision a plan sponsor must make is whether to select a bundled or unbundled provider of these three services. With a bundled model, a plan sponsor selects one provider for all the record keeping, administration and possibly investment services. Bundled service providers serve as a one-stop shop generally offering one standard plan with less flexibility. In an unbundled plan, the plan sponsor selects services from a combination of independent service providers. This enables the plan to pick best-in-class service providers including investment options.
Many small companies choose a bundled plan because they do not have the staff to select and manage multiple service providers. However, some plans gravitate towards unbundled services as they grow in order to seek more control and look to add a wider variety of investment options.
Deciding whether to select bundled or unbundled services rests on a number of factors. What plans may gain in terms of flexibility they may trade off in terms of complexity, and sometimes in cost. The following table compares a number of these factors as they generally relate to bundled and unbundled plans:
- Data reliability. With a bundled product, there is less data checking or “scrubbing” of the information to make sure the it is submitted correctly. In contrast, third party administrators who provide unbundled services may check the retirement plan information provided by the client against payroll reports to make sure the information is correct.
- Costs may not be that much higher. Unbundled plans are often thought to be more expensive because the client needs additional services that in-house staff can’t provide. However, many unbundled providers work hard to provide comparable costs, especially if the record keeper can offer revenue sharing to offset some of the third party administration costs.
- Penny wise pound foolish? We encourage clients to weigh plan costs against long term outcomes. A plan could be inexpensive in the short term, but poorly managed services and mistakes might lead to costs in the future. Unbundled providers, because they focus only on a niche service area, usually offer higher quality services in their area of expertise.
- Quality begets quality. Partnering with a best-in-class investment advisor who has good working relationships with record keepers and TPAs can allow you to find other providers who work well together on your behalf.
- Big box versus boutique. Bundled providers generally offer cookie cutter services – different plans gets similar services with less customization. An unbundled provider has a lot more flexibility with plan design and consulting to allow you to customize to your needs.
In the end, most smaller plans are willing to pay for the added service and additional confidence that come with working with unbundled partners. Plans can rely on the service provider’s experience to provide the knowledge and support they may lack on staff. Providers may be willing to invest in the relationship over time leading to quality outcomes in the end.